


Business Management and Financial Reporting for Dwarves

by Crabbadon



Category: The Hobbit - All Media Types
Genre: Accounting, Alternate Universe - Coffee Shops & Cafés, Business Management, Economics, Educational, Gen, Silly
Language: English
Status: Completed
Published: 2017-02-02
Updated: 2017-02-02
Packaged: 2018-09-21 13:56:44
Rating: General Audiences
Warnings: No Archive Warnings Apply
Chapters: 1
Words: 2,687
Publisher: archiveofourown.org
Story URL: https://archiveofourown.org/works/9551903
Author URL: https://archiveofourown.org/users/Crabbadon/pseuds/Crabbadon
Summary: Dáin explains annual financial reporting to Thorin after the successful hostile takeover of Lonely Mountain Corporation. More an Azhâr AU than a Hobbit one as honestly I only saw one of the Hobbit films.





	

**Author's Note:**

  * For [yubiwamonogatari](https://archiveofourown.org/users/yubiwamonogatari/gifts).
  * Inspired by [Azhâr](https://archiveofourown.org/works/4063402) by [yubiwamonogatari](https://archiveofourown.org/users/yubiwamonogatari/pseuds/yubiwamonogatari). 
  * Inspired by [Azhâr](https://archiveofourown.org/works/4063402) by [yubiwamonogatari](https://archiveofourown.org/users/yubiwamonogatari/pseuds/yubiwamonogatari). 



Thorin took his head in his hands, staring at the sheets of paper in front of him. A headache was creeping up his scalp and he was beginning to wish that he had died in the shootout. When he looked up, Dáin was watching him from the doorway.

“Trouble?”

“No, I just… I misplaced my calculator. Having to sum everything up in my head.”

“Ah, of course. Well, as long as the operating revenue and the equity are more than the interest expense, I think we’ll be alright. I’m sure I can fetch you another calculator, though.”

“Ah, well, yes, perhaps that would be best. I am sure there is one in the stationary cupboard.”

“None of what I said made any sense, Thorin.”

“Did it not? No, I mean, of course not. My apologies, my mind was elsewhere.”

“Thorin. Do you know how to read a financial statement?”

“Well, of course I – I mean – it is just so HARD!”, Thorin complained, rolling back in his chair dramatically. “There are all these numbers in different categories, and they all mean something to each other, but half of them turn up on some of the sheets and not the others and I just do not understand why! You put it together; why can I not just sign it? Why does it matter if I understand it?”

Dáin looked as if he were about to say something sharp; then, sighing, he sat down next to Thorin in a hideously outdated lime-green chair, one of the ‘executive looking’ chairs that he had salvaged from storage. “Well, two reasons. Firstly – do you remember that episode of SG-1 we watched on the coach? You couldn’t understand how Colson could go to jail after Vogler cooked the books, right? Well, he signed off on those financial statements, you see? So if you sign off on these, and they’re wrong –”

“For Mahal’s sake, that is why I asked _you_ to write them in the first place! I trust you, and I am sure you will have made no mistakes. Just let me sign them then – Hey!” Thorin broke off as Dáin snatched the pen from his hand.

“You most certainly will not! Now, of course I haven’t made any mistakes – honestly, it was mostly a simple copy over from Smaug’s last accounts, and those were already audited – but that doesn’t mean you don’t need to understand the statement! Because, unless you’ve forgotten, you’re the CEO!”

Thorin rubbed his eyes. “Do not remind me. I still say you should have gotten Fíli to do it. The way I acted after getting hold of the Arkenbeans –”

“Now, stop that. I didn’t offer to help you just so you could pity yourself at me. You’re CEO, and that’s that. All the shareholders – well, ninety three percent of the shareholders – are behind you on that. You may not have a head for finances, but you’re a star with human resources. And nobody’s going to blame you for what the Arkenbrew did to you. Now, that’s final – I’m not having this argument again. Just tell me what you’re having trouble with.”

 

“Everything! I do not even understand what the three different pages are for.”

“Alright. Well, let’s begin at the beginning. This sheet is the balance sheet, see? It summarises your financial situation, as it stands. There’s three main headings here – assets, which is everything we have to our name, or are entitled to claim; liabilities, which is everything we owe now or will have to pay later; and equity. Equity is the leftovers – if we could somehow sell all our assets and pay off all our liabilities, what would we be left with? It’s assets minus liabilities, which means that liabilities **plus** equity equals assets, you see? Or you can think of equity as a special kind of liability – it’s what we owe our shareholders. Alright?”

“No,” answered Thorin, a hint of desperation in his voice.

“Alright. Well – look.” He took out a handful each of Fangorn Red and Mordor Darkdrop Roast, lining up the beans next to each other. “So the black beans are our assets, and the red beans are our liabilities. We’ve got ten beans in assets, and six in liabilities. Alright?”

Thorin nodded.

“So if we pair these six beans off – if we used our assets to pay our liabilities – we’re left with four beans. That’s all our ‘spare’ assets, if you like. If I were Smaug, as a sole proprietor, I could do just that – wind up the company, sell all the assets, pay off all the liabilities and walk away with four beans for myself.

“Right. So the equity is some of the assets?”

“No! It’s something that we might have to pay out – so we count it on the same side as liabilities, and it’s always just enough to make both sides balance.” Dáin added four Misty Mountains Gold Roast to the liabilities side, next to the Forest Red; ten black beans against six red and four gold. “Do you see?”

“Well enough to be getting on with, I think. So, you have assets on one side, and liabilities on the other, and make up the difference with equity?”

“That’s exactly right!”

“And equity is what the owner is entitled to?”

“Well, the shareholders.”

“How do you mean?”

“Listen. When Smaug ruled this place, he was a full owner. He was entitled to all the equity, yes. But each of us in the Company has a single share – making us each entitled to one fourteenth.”

“I see. Equity is the thing that shareholders have a share in.”

“That’s right, aye, and a share in decision making at the general meeting, too.”

Thorin nodded, a little more eager, understanding how this part worked already. “Well, then. What of the subcategories?”

 

“Well, let’s look at assets. There’s two categories here – current assets and property, plant and equipment. Current assets is essentially your liquid assets.”

“Liquid assets? Like… the coffee?” Thorin fought to stop from cracking a smile.

Dáin shot him a look. “If you’re going to be cracking jokes, you can get someone else to teach you.”

“Sorry.”

“Now, then. They’re liquid assets because you can move them easily, without them losing too much value. The two you’ll always see is cash on hand and accounts receivable.”

“Now, I understand this. Cash on hand is what is in our bank account, and accounts receivable is payment owing, yes? So unpaid bills from the Dale office complex.” Thorin leaned forwards, his finger running over the page.

“That’s it. And anything else like that goes under current assets. Now, PPE is things that can’t be shifted just like that – selling them off would take time and effort, and the faster you sell them the more money you probably lose. Still, they have fundamental value – you could secure a loan against them, for example, or liquidate them if the worst came to the worst – so they’re assets all the same. This covers Lonely Mountain itself, the roasters, the tables, chairs – all that.”

Thorin pointed at the page. “Depreciation – is that tracking how much value they lose over time?”

“Exactly! We don’t have much depreciation – everything’s sturdy Dwarven work, in demand and hard-wearing. But if Lonely Mountain were revalued as a property, say, that would cause depreciation – or appreciation.”

“I understand. Why are coffee beans under current assets and not PPE?”

“Well, aren’t you going to sell them? They’re goods, consumables, in constant turnover.”

“Right, right. So, the next column?”

 

“This is much the same – you have current and long-term liabilities. Current liabilities covers notes and accounts payable – notes are any promises to pay you’ve issued, such as gift cards, say, and accounts payable are for bills you’ve not paid yet. So if you’ve been invoiced from a grower, then if you’ve paid it, that comes out of your cash, and if you haven’t paid it yet, it’s a payable account.”

“Why does it say notes payable twice?”, Thorin asked, picking up a dry quill to point a little more clearly. “See, here – current portion of notes payable, and down there, notes payable.”

“Ah, right. The current portion is what you expect to pay before the next report – so over the next month. The second entry under long-term liabilities is the total, minus the current portion.”

Thorin raised a hand and sat back, writing that in the air with his finger and pointing at each part, lips moving as he went over it. Finally, he leaned back forwards. “I get it. And that is less the current portion, because otherwise it would be listed twice?”

“Yes. Now, where was I… aha. So the rest is any other immediate liabilities. Lawsuits, for example. Or if you wanted to split up notes payable so gift cards were separate. Now, under long-term liabilities, the only other thing you’ll usually have is loans which need repaying – not actually a problem for us, as we have such enormous liquidity we rarely take out loans. And that’s it for the balance sheet.”

 

“Wait – there’s subheadings for equity as well.”

“Right. Well, equity is normally divided into share capital and retained earnings. Our balance sheet is quite unusual; because we were all awarded shares as sweat equity –”

Thorin raised a hand, but Dáin anticipated his question.

“– equity derived from labour, not capital. Because of that, we have no share capital – no equity accounted for by the sale of shares. And because we’ve not awarded much in dividends, and have such huge cash reserves, the retained profit is huge – normally we’d drain that off as dividends.”

“But what _is_ retained profit?”, Thorin pressed.

“That’s equity earned by the function of the company.”

“Is it just profit?”

Dáin shook his head. “No, because we invest some of the profit back into the company.”

Thorin nodded, pleased. “I think I understand the balance sheet now. What is the next one?”

 

“So this is our profit and loss statement. It accounts for our net income from actual business activities – that is, selling coffee.”

“Alright. Should it not be… simpler than that?”

“Will you just wait? I’ll step you through it. The first part is quite simple – gross profit. That’s two parts – sales, so the sum of all our sales receipts, minus cost of goods. So if we have –” Dáin reached for the beans again – “If we have ten beans to start with, spend two on goods” – he explained, moving them as he spoke – “and sell those goods for six beans, then we have fourteen beans – four more than when we started. So our sales is six beans, our cost of goods is two beans, and our gross profit is four beans.”

“I thought the beans were the goods?”

Irritated, Dáin swept them back into the bag. “Oh, you know what I’m trying to say. Now then, after your gross profit you have all the other expenses of doing business – your operating expenses. There’s selling expenses – expenses incurred in a way directly related to selling your goods, itemised into salaries, advertising and promotions in our case, but it might also include fees and licenses – and administrative expenses – expenses incurred in running the business which you’d incur whether you were operating or not, like office supplies, and rent, and utilities.”

“You… went a little fast there.”

“Shall I get the beans back out?”

“Please.”

Dáin tipped out a good number of beans, making a neat eight by eight grid. “Look – let’s say you made 64 beans in profit. You pay your shop staff eight beans –” he said, sweeping them towards a figurine Bifur had made of himself “– as a salary. You also pay them, say, three beans as a commission. You paid out four beans for advertising –” he continued, sweeping the beans towards a pile of business cards, “– making fifteen beans in operating expenses. The utilities company charges ten beans for gas and electric –” sweeping towards the radio “– and you waste two beans on ink trying to work out your receipts, making twelve beans in administrative expenses.”

Thorin scowled at the unnecessary jab at his financial skills. Dáin, ignoring him, carried on.

“That’s twenty-seven beans in operating expenses, and sixty-four beans in operating income – so then underneath those your operating profit is thirty-seven beans.”

 

Slowly, Thorin nodded. “I see. That is not as complicated as it looks.”

“I keep telling you, boy. You just need to not be intimidated.”

“Dáin, I am _twenty years_ older than you.”

Dáin furrowed his brow, surprised. “Really? 2747?”

“2746, actually. Twenty-one.”

“Hmpf. Well, you don’t act it.” While Thorin choked, Dáin pressed on. “Anyway. Non-operating income isn’t all that important to us just now but it probably will be, given our cash reserves – it’s any sort of money from investments and interest. So, if we as a company buy shares in another company and that company issues dividends, say, that comes in here under dividends; if we lend money, then the interest which accrues would come in as interest revenue.”

“Alright. I shall think more about that when it becomes relevant. Is that really it?”

“That’s really it.”

 

“Alright. And the last one?”

“This covers cashflow, specifically.”

“Why does that need a separate sheet?”

Exasperated, Dáin eyeballed his CEO. “Well, it turns out cashflow is just a _little_ bit important. Just try paying the power companies in coffee beans and you’ll see what I mean. Trust me – illiquidity kills more companies than negative equity.”

Thorin’s face froze into a deeply intimidated rictus.

“… Don’t worry about those terms. Just look at the headings, they’re really not that hard. Cash flows from operating activities is just like in the P&L statement, see? Net income you take right off of the P&L sheet, then you have adjustments. This is any differences which come about from conversion to ‘cash basis’ - it just means turning bills into actual cash. Any charges or conversion rates you wind up paying. So you add differences in accounts payable and receivable, like in the first sheet, and deprecation and amortisation – so, changes in the cash value of things. Sum it all up and you have net operating cash.”

“I get that. And then cash flows from investing activities – that would be actual purchases and payouts of investments and so on?”

“Exactly right. Finally, I’ll slow down for cash flows from financing activities, because that’s important. Sale of common stock – if we were to sell more stock in the company, we’d record the income from that here. Now, then it would be separated into par value – the notional sum we would buy it back for, as a standing offer – and additional value, but I wouldn’t worry about that at all. The other important part is dividends. We fourteen will probably want to start paying ourselves dividends soon – drawn from equity – and that will be negative cashflow in this section. So, if, say, Master Bilbo wished to cash in his share, but we didn’t want the company to just buy it back for some reason, we could all draw one-fourteenth of the equity and buy one-thirteenth each of Master Bilbo’s share with it. A silly way to do things, but –”

Thorin’s face did that thing again.

“… Or, more straightforwardly, we could decide to draw ten thrones next month, in which case we’d put a cash loss of 140 thrones in this section. Now, ten times fourteen is 140 see...”

Thorin waved a hand at his sarcastic cousin. “Yes, thank you, I think I can handle simple arithmetic. Genuinely, though, my thanks. It’s really not as hard as I thought, is it?”

“I find many things aren’t, so long as you understand them.”

“I shall have that engraved on a plaque.”

“I’d make you hang it above your desk.” Dáin offered Thorin a slightly warmer smile than he usually managed as he stood. “Well, I’ll let you get on. I’ll send Master Baggins up in an hour to take diction.”

“Diction? What for?”

“Well, you need to write the letter to the shareholders for the annual report...” Dáin answered as he slipped out of the door, actually chuckling as he fled Thorin’s anguished groan.


End file.
